After a day of gains the Dollar pulls back again, Euro and Pound tick higher

After a strong start for the week the Dollar pulled back over the past 24 hours and gave up some of its gains against the rest of the majors. The US currency has been showing a fragile performance over the past few days and as we move closer to the Fed rate decision investors are growing more and more concerned.

Even though the latest results from the US are showing a good progress in the domestic economy the performance of the Dollar is not what one would expect. An interesting opinion has emerged among analysts that the reason the Dollar is suffering recently has to do with the big drop in oil prices. Without getting into any complicated economic analysis, it is suggested that with oil prices that low the US economy will have a hard time hitting its inflation goals and that could drive the fed to be more bearish than expected.

We do believe that the Dollar has a better outlook that the rest of the majors clearly because there is a huge divergence between the fundamental drivers in the economy but the markets are also driven by expectations and sentiment hence we could see some more fragile performance from the buck. In any case, today we should expect another day of limited volatility and smoother price action as the economic calendar holds only second tier reports and events.

Taking a look at the price action, the Euro has climbed above the 1.0900 level after testing the 1.0800 lows at the beginning of the week and is looking towards the 1.0950 highs of last week. There has been little news to drive the Single currency higher hence the correction has to be attributed to the fragile Dollar performance. Given the divergence in the fundamentals though we believe that the risk for the Euro is to the downside and we should be on the lookout for reversal opportunities.

The Cable started the day lower yesterday making it all the way to the 1.4950 level when the Production reports printed mixed leaving the domestic economy’s outlook unclear. However as the US markets came online the Pound started recovering against the Dollar and this morning is trading around the 1.5040 area. The correction seems inviting enough but the bias remains bearish and we believe that the key here is to treat all rallies higher as opportunities to sell the Pound at a higher price.